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The Simple Math Behind Early Retirement

mrmoneymustache.com

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Re: The Simple Math Behind Early Retirement

#31

Post by bproctor »

I don't know whose life works in this extremely simple way, but it sure isn't mine. I've gone from making good money to being broke to making good money again and everywhere in between in my 35 years on this planet.

These types of things never make any practical sense because they assume I'm going to be working at the same job for the same pay for the next 30 years or so. Maybe that was the norm in the '60s but few people do that anymore.

Saving money is good, no doubt, but if you're concerned about retiring early, you're much better off figuring out how to do it by making more money.

Re: The Simple Math Behind Early Retirement

#32

Post by RyanZAG »

Interestingly, if you look at the break-down of how much you spend, for many people a majority of that spend is simply a function of where they live. If you're living in SF, your food+housing+etc is going to be a far greater multiple than if you live out in the sticks.

So I'd say the best way to retire early is probably to get a telecommuting job that pays similarly to your current job, and move to VietNam or Africa. Your expenses should be a fraction of what they were before, and your income should remain similar. Instant years off your working career and no traffic pollution to spoil your day. I think we might be seeing more of this in the future...

Re: The Simple Math Behind Early Retirement

#33

Post by brazzy »

liber8 wrote: post #25
brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. No, it doesn't. Money cannot earn money, people do. Saving/investing money only allows people (via an arbitrarily complex system of indirections) to become indebted to you so they'll pay you some of the money they earn. This is vitally important because it means it's impossible for a significant percentage of people to reti…

You do realize you've disproved your own point, right? >>This is vitally important because it means it's impossible for a significant percentage of people to retire early unless the remaining workforce becomes correspondingly more productive ... >>Arguably, that is already happening even without additional early retirees, simply because the increased average life expectancy (and thus the time people spend in retireme…

I haven't disproved my main point at all (returns from investment are ultimately funded by the working population) - just perhaps not given the proper weight to the caveat about increased productivity when talking about the effects.

However, fact is that most people's incomes have stagnated or decreased. The increased productivity is not quite enough to compensate for the increasing number of retirees and/or super rich (the article linked to by hudibras implies it's actually mainly the latter).

Re: The Simple Math Behind Early Retirement

#34

Post by brazzy »

scottkduncan wrote: post #21
brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. No, it doesn't. Money cannot earn money, people do. Saving/investing money only allows people (via an arbitrarily complex system of indirections) to become indebted to you so they'll pay you some of the money they earn. This is vitally important because it means it's impossible for a significant percentage of people to reti…

I think the impact of this phenomenon is partially mitigated by globalized finance, i.e. I can save/invest my money in countries with different demographic profiles than my own. Capital won't stay in countries where everyone is trying to retire early - it will flow to countries where it is relatively scarce and earns a higher return.

Of course this only delays the eventual development, unless you fancy perpetuating international class differences.

Re: The Simple Math Behind Early Retirement

#35

Post by dmm »

brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. No, it doesn't. Money cannot earn money, people do. Saving/investing money only allows people (via an arbitrarily complex system of indirections) to become indebted to you so they'll pay you some of the money they earn. This is vitally important because it means it's impossible for a significant percentage of people to reti…

> unless the remaining workforce becomes correspondingly more productive.

It's not impossible. Everyone can just become poorer. That doesn't have to be a bad result when you consider just how wasteful most modern lives are.

Re: The Simple Math Behind Early Retirement

#36

Post by outside1234 »

There is a incorrect assumption - you can't take out 4% if you are only assuming at 5% rate of return. The 4% number comes from an assumption of 8.5% (long term stock market returns) minus inflation minus taxes. So in your 5% assumption, this means you can only take out 0.5% or less.

But the article is overall directionally right. The less you spend on shiny, the less you need, and therefore the less you need for retirement.

Re: The Simple Math Behind Early Retirement

#38

Post by hudibras »

It's always embarrassing to admit that you're a part of a cult, but I'm a huge fan of MMM and his spiritual godfather Jacob (earlyretirementextreme.com) and I'm currently on track to retire in 4 years in my early forties.

Few points to remember as you browse the site:

1. Retiring early means that your post-retirement life could very well be 50 years long. Over that timeframe, 5-7% return on investments is a reasonable assumption.

2. Living on your investment income also means drawing down your principal eventually. The "goal" is to draw the last dollar from your retirement account on the day that you die (nobody actually believes that, what with passing money to your heirs, your presumably unknown date of death, and at least a small trickle of social security continuing, but that's the theory.)

3. Some of the lifestyle changes seem drastic, but you have to remember one thing: you are no longer working. Having complete freedom to do what you want each day is the whole point of retiring early.

Re: The Simple Math Behind Early Retirement

#39

Post by rayiner »

brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. No, it doesn't. Money cannot earn money, people do. Saving/investing money only allows people (via an arbitrarily complex system of indirections) to become indebted to you so they'll pay you some of the money they earn. This is vitally important because it means it's impossible for a significant percentage of people to reti…

Bingo! This is why I find a lot of the economic debates frustrating. People think that money in the bank is like cans of pork and beans in storage. They don't realize it's just an earmark on the labor of some future person.

Re: The Simple Math Behind Early Retirement

#40

Post by jrheard »

bproctor wrote: post #31

I don't know whose life works in this extremely simple way, but it sure isn't mine. I've gone from making good money to being broke to making good money again and everywhere in between in my 35 years on this planet. These types of things never make any practical sense because they assume I'm going to be working at the same job for the same pay for the next 30 years or so. Maybe that was the norm in the '60s but few p…

If you save a high enough percentage of your take-home income, the article actually argues that you could be done in 7-10 years starting from scratch, which sounds a lot more doable to me than the 30 years you're expecting.
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